With 2011 drawing to its close, we are seeing all kinds of 2012 market prediction flying around. The so-called “pros” are sharing what they are seeing in their “crystal balls.” Dear investors, if you paying any attention to these predictions, you are not only wasting your time, you may lose money, too. Just a few examples of how wrong these “pros” can be:
1. Last year, Barron’s survey of 12 “investment professionals” forecast a 15% gain for Stoxx Europe 600. So far the index did make that 15%, but in exactly the opposite direction. It lost 15% instead. Now these “pros” are predicting a 8.6% gain for 2012, apparently less bullish as the market has shown what they did not see.
2. On interest rates, these “pros” forecasted that the long-term rate would rise in 2011. We all know what happened. Now the rate is sitting at a historical low, and staying there comfortably.
These “pros” continue to make wrong predictions, but they still make predictions all the time, whenever they get to attract attention. You may wonder why. These are our observations on these predictions:
They are always bullish
Rarely have we seen bearish predictions from these “pros.” What they imply is really. “The market will go up, invest in my fund.” A bullish prediction is certainly much easier to convince investors to invest in their funds. The more money they attract, the more fees they will be able to collect. No matter what investors’ return is.
They may try to misguide you, intentionally
It puzzles us often when we see reports that these “pros” make their predictions based on very simple “P/E” ratios. We wonder if they are insane. Then we realized that they may be doing this intentionally.
These people are not stupid. They want to make their bullish case, so they use a simple “P/E” ratio to justify their predictions, making them look right. They know what they said will not happen. But if someone can believe and transfer their money over, it doesn’t hurt them.
Above all, they are protected for making wrong predictions.
What if they get it right once?
Warren Buffett said it best, “Even a dead clock is right twice a day.” If they happen to get it right, they will become heroes. They can brag about their record until the next time when they get it wrong. The odds they get the direction right is at least 50%, much higher than a dead clock. So why not?
They can change quickly
Most of these “pros” look at the rear view mirror to make their predictions. If the headlines change, they will change their mind, quickly. As someone whose performance numbers are watched quarterly, or monthly, if not daily, they are forced to focus on short-term market moves.
So if news headlines change, they will be guided to different directions themselves.
They know investors have short memories
With millions of headlines flying around every day, it is very rare that investors will check the old headlines and earlier market predictions to verify the credibility of these people. So these “pros” don’t need to worry about making wrong predictions. Therefore they are never afraid of making predictions. Above all, who will remember what they said after two hours?
******
So if you really want to know what the market will perform, what should you do? The best place is to look at the market valuations. It will not tell you what market will return over the next year, but it can give you a very good idea of long-term market returns. As Warren Buffett told us, long-term market return is not affected by headlines; it is a function of current market valuation, interest rate and business performances. Shiller P/E will give you a similar conclusion, but with a different approach.
By the way, both GuruFocus’ market valuations page and Shiller P/E page are for the U.S. market. We will soon release a new page for worldwide stock market valuations.
If you are an investor with a decades-long of time span, you should ignore all market predictions. Buy good companies at reasonable prices will be the most rewarding approach for you.
So how much will the stock market return for 2012? Or does that matter?
1. Last year, Barron’s survey of 12 “investment professionals” forecast a 15% gain for Stoxx Europe 600. So far the index did make that 15%, but in exactly the opposite direction. It lost 15% instead. Now these “pros” are predicting a 8.6% gain for 2012, apparently less bullish as the market has shown what they did not see.
2. On interest rates, these “pros” forecasted that the long-term rate would rise in 2011. We all know what happened. Now the rate is sitting at a historical low, and staying there comfortably.
These “pros” continue to make wrong predictions, but they still make predictions all the time, whenever they get to attract attention. You may wonder why. These are our observations on these predictions:
They are always bullish
Rarely have we seen bearish predictions from these “pros.” What they imply is really. “The market will go up, invest in my fund.” A bullish prediction is certainly much easier to convince investors to invest in their funds. The more money they attract, the more fees they will be able to collect. No matter what investors’ return is.
They may try to misguide you, intentionally
It puzzles us often when we see reports that these “pros” make their predictions based on very simple “P/E” ratios. We wonder if they are insane. Then we realized that they may be doing this intentionally.
These people are not stupid. They want to make their bullish case, so they use a simple “P/E” ratio to justify their predictions, making them look right. They know what they said will not happen. But if someone can believe and transfer their money over, it doesn’t hurt them.
Above all, they are protected for making wrong predictions.
What if they get it right once?
Warren Buffett said it best, “Even a dead clock is right twice a day.” If they happen to get it right, they will become heroes. They can brag about their record until the next time when they get it wrong. The odds they get the direction right is at least 50%, much higher than a dead clock. So why not?
They can change quickly
Most of these “pros” look at the rear view mirror to make their predictions. If the headlines change, they will change their mind, quickly. As someone whose performance numbers are watched quarterly, or monthly, if not daily, they are forced to focus on short-term market moves.
So if news headlines change, they will be guided to different directions themselves.
They know investors have short memories
With millions of headlines flying around every day, it is very rare that investors will check the old headlines and earlier market predictions to verify the credibility of these people. So these “pros” don’t need to worry about making wrong predictions. Therefore they are never afraid of making predictions. Above all, who will remember what they said after two hours?
******
So if you really want to know what the market will perform, what should you do? The best place is to look at the market valuations. It will not tell you what market will return over the next year, but it can give you a very good idea of long-term market returns. As Warren Buffett told us, long-term market return is not affected by headlines; it is a function of current market valuation, interest rate and business performances. Shiller P/E will give you a similar conclusion, but with a different approach.
By the way, both GuruFocus’ market valuations page and Shiller P/E page are for the U.S. market. We will soon release a new page for worldwide stock market valuations.
If you are an investor with a decades-long of time span, you should ignore all market predictions. Buy good companies at reasonable prices will be the most rewarding approach for you.
So how much will the stock market return for 2012? Or does that matter?
